Why Murdoch May Be Right, and Shirky Wrong: Paywalls Can Work

In a July 5th interview with the Guardian newspaper, writer and academic Clay Shirky argues that paywall schemes -- like that of News Corp. (NWS) head Rupert Murdoch -- will fail to bolster newspapers' sagging revenues. For the sake of context and clarity, this quote deserves to be reproduced at length (emphasis mine):

Everyone's waiting to see what will happen with the paywall -â€" it's the big question. But I think it will underperform. On a purely financial calculation, I don't think the numbers add up... Here's what worries me about the paywall. When we talk about newspapers, we talk about them being critical for informing the public; we never say they're critical for informing their customers. We assume that the value of the news ramifies outwards from the readership to society as a whole. OK, I buy that. But what Murdoch is signing up to do is to prevent that value from escaping. He wants to only inform his customers, he doesn't want his stories to be shared and circulated widely. In fact, his ability to charge for the paywall is going to come down to his ability to lock the public out of the conversation convened by the Times.

Shirky's observation is exactly right for all forms of media except newspapers. Yes, if you're talking about music or film, it's very hard to convince people to pay when so much great stuff is being generated for free.

But newspapers -- news, in general -- is predicated on timeliness: the first people out of the gate with a hot story get the reward of a monstrous wave of traffic, sending advertising dollars through the roof. This is why blogs have been pulping the newspaper sites for the last few years: they're faster on the draw, even when they're not the primary source of the reporting, and they SEO and headline their posts to get maximum exposure.

But now that the playing field has leveled, and newspapers and magazines have begun hiring Web-savvy editorial staff and technologists, it's becoming harder for blogs to leverage their agility. Even profitable blogs (a catchall term I'll use for any "free" news source, be it Gawker or Drudge) can't afford big staffs of reporters. (The sole exception may be the Huffington Post, which is as close to a real newspaper as most Web operations get.)

Reporters are the ones who break news. They're privy to the high-up sources, they have experience on their beats, and they know how to drag dirt out of interviewees. (Look no further than the recent Rolling Stone story on Gen. Stanley McChrystal for evidence of such doggedness.)

Good reporters don't work for free, and to break news, you need quite a few of them in several geographies. For some events -- say, natural disasters -- it's true that any well-placed citizen with a camera will serve. But for deeper stories involving complexities of power, economics or politics, a story needs an investigator with ample background knowledge to sniff out the story and execute reporting. You need fact-checkers. You need researchers. You need the leverage of a well-connected newsroom.

Blogs can't afford any of that; they rely primarily on secondary sources. Even cable news networks, with their boatloads of cash, draw much of their "reporting" from the papers (see again the McChrystal case). But, as Shirky correctly says, they operate on a different principle than paywall newspaper sites. While the newspapers want to keep people out, and let only the paying customers in, blogs and TV channels endeavor to have their words and images seen by as many people as possible.

This sets up a vertical scenario in which the paywall papers originate the news, and the blogs and television distribute it. As I've argued before, this is an opportunity for monetization and fat margins for newspapers: the blogs (at least those that are actual businesses) will gladly pay for quick-as-possible access to original reporting so that they can turn around and disseminate their digests. For a premium, newspapers may even give access to more photos or extended reporting for blogs that can afford it, or hook TV reporters up with access. Plenty of well-heeled readers will also gladly pay for first crack at the news for the privilege of getting their news from the source. (At least, that's what News Corp.'s market research must have determined.)

In a sense, this model of mutualism isn't so unheard of in media; in fact, in other entertainment industries like film and music, the producer and the distributor are not typically the same entity, but may simply be cooperating partners.

Shirky says that the paywall will be defeated by the "unlimited amount of zero-cost reproduction of any digital item by anyone who owns a computer." But when time is of the essence, a paywall will force some customers to pay up and climb.